Utilities have now seen three straight down days. The ETF tracking the sector (trading under the symbol XLU) is off by nearly 3 percent since Monday.
Nonetheless, the XLU has been a fantastic moneymaker. Since the start of 2014, the ETF is still up 19 percent, nearly twice the return of the S&P 500. Not bad for a sector known for its safety and plump dividends.
But with the sector now in a bit of a selloff, is it time for investors to turn the lights out on their utilities holdings? No, says one investment manager.
Erin Gibbs, equity chief investment officer at S&P Capital IQ Global Markets Intelligence, believes there's still more room on the upside for the sector.
"I don't see utilities peaking," she said. "I'd hold here."
Gibbs, who has over $13 billion in assets under management, analyzed the components of the XLU. According to her data, the ETF is trading at 17.5 times its forward earnings but has an expected earnings-per-share growth rate of 20 percent over the next year. That would be tremendous for an industry that is usually thought of as low-growth.
"That growth greatly surpasses the broader S&P 500 market of 9 percent," she said. "At 17.5 times [forward earnings] and with a 3.4 percent dividend yield, it looks to be trading at very fair valuation levels."
Gibbs also expects U.S interest rates to remain low for some time, more because of low global rates than because of Federal Reserve policy. With that in mind, she sees further upside for utilities since the sector's high dividends offer an enticing stream of cash when bond coupons aren't enough.
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"Between the macroeconomic situation with low interest rates and strong earnings growth, it looks attractive to me," Gibbs said.
Likewise, the technicals are also positive on XLU, according to the chart work of Mark Newton, chief technical analyst at Greywolf Execution Partners.
"It's early to recommend getting out of utilities," Newton said. "They remain technically attractive and have consistently been a top performing sector on a year-to-date basis and over the last three and six months."
Newton's short-term chart shows the XLU to have built a base, after which it moved in "parabolic" fashion when it broke above its summer highs around $44.36. Though he thinks the ETF was slightly overbought, the recent pullback helps to alleviate that worry. "Despite the selloff, the broader trends remain very well intact," he said.
In fact, Newtown sees any dip toward $44.36 as a buying opportunity. The XLU traded around $45.13 on Thursday.
And though he also thinks the XLU has gotten a bit stretched from its longer-term uptrend line dating back to 2010, Newton remains positive on it.
"The ongoing uptrends for utilities… remain in good technical shape with positively sloped momentum and no real signs of trend deterioration," he said. "Until we see proper evidence of trend damage, utilities remain an attractive sector technically and one should remain overweight, looking to add on small corrections."